The stock market correction

The current market volatility results mainly from the following three important issues:

• Uncertainty about the current high inflation levels – whether it is relatively short-term, or more structural in nature.
• Uncertainty about potential Central Bank actions to curb the inflation risks.
• Elevated geopolitical risks with fears of Russia potentially invading Ukraine.

There are currently various contributors to the spike in inflation (supply chain bottlenecks, wages, energy, etc). Our perception is that inflation may remain high for another few months, but into the second half of the year the former can start easing, with supply becoming more able to satisfy demand in the economy. That may contribute to an ease in inflation levels, most probably still settling above current Central Bank targets, but easing fears of uncomfortably high inflation.

We believe central banks will act responsibly, but as often at the beginning of a new tightening cycle, there is risk that their actions may be misinterpreted as too late or too little.

On the geopolitical front, of course the stock market impact is a function of the particular event. Historically, though, as with the invasion of Iraq, the market dropped in anticipation of the military invasion, and bottomed out shortly afterwards.

These uncertainties can continue to cause volatility for some time still. The current shakeout is unpleasant, but in a way healthy to rid the market from too much optimism and some exuberance. Many of the low or no profit ‘moonshots’ should not have been able to attract so much money - that bubble is now gone. That was the right thing to have happened.

Critically, we believe we are at a mid-cycle phase of the current economic growth cycle. We guard relentlessly against complacency and short term trading activities in trying to outguess the market. We stay true to our investment philosophy, focus on outstanding cash generators in growth businesses, and ensure the holdings have strong pricing power that can operationally handle inflation risks well.

The market volatility offers good new strategic investment opportunities that we can consider for implementation at the appropriate time.

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